A window of opportunity has opened for European policy since growth rates rebounded. But whether growth will continue for a time long enough for reducing the fiscal burden, unemployment and inequality depends on strategy changes, write Karl Aiginger and Heinz Handler.

It was not a politician, but the Economist’s issue of August 12th which declared that “the end is in sight for the machine that changed the world”. At the same time, at “Diesel summits” policy leaders and managers of large European firms have been discussing how to prevent penalties for firms that have deceived customers, taken hostage of regulators and lobbied in Brussels for the postponement of stricter limits. It was discussed whether software adjustments or a new SCR-catalytic converter would suffice and whether a premium should be paid by governments or firms if a new Diesel engine is bought to substitute an older one.

It is not about Diesel but about all combustion engines

The discussion was limited to the Diesel engine, but as the Economist stresses, gasoline is only marginally better for some emissions and worse for others. This becomes evident if we recall which problem has to be solved. We have to stop climate change. With this aim, 190 countries signed the Paris Agreement. It sets the goal to limit global warming to (well below) 2 degrees. This target can only be reached if CO2 emissions are reduced by 80-95 % up to 2050.

This implies that transport as well as building should become carbon-neutral, without any net emissions by 2050 onward. The remaining 5 to 15% are necessary for industrial production, cases of emergency and low-income regions.

Necessary cuts in emissions may come from energy efficiency, changing behavior, shifts to public transport, sharing instead of buying and smarter city planning. However, mobility is a central component of welfare and personal freedom; and this includes the use of private cars, airplanes, trucks and cruises. For all these activities, it is not sufficient if gasoline and diesel engines become cleaner; instead, the combustion machine has to be substituted by alternatives. Fortunately, some are available. Let us focus on electric cars – an alternative on the brink of competitiveness today.

Are the costs still different?

Whether electric cars are already efficient and cheap today depends on the way you look at it. Let us distinguish three perspectives: myopic individual costs; an enlightened individual perspective; and the evaluation from society’s point of view.

The “myopic individual perspective” looks at the costs of buying a car. Today, the purchasing cost of an electric car is higher than that of combustion-driven cars. This may soon change, perhaps within two or five years. Competition is not yet strong, with firms trying to skim rich and green customers. However, battery prices are dropping quickly and ranges of a battery charge are increasing.

The “enlightened individual perspective” calculates lifetime costs. Most studies show that costs of ownership are lower since recharging is cheaper and service costs are lower. The reselling price of cars with combustion engines will fall dramatically with each city limiting their use.

“Society's perspective” includes the costs of climate change, smog, floods and droughts. WHO estimated that 4 million deaths worldwide are annually caused by local air pollution. Emissions increase child mortality and lower life expectancy.

While in the myopic perspective it might still be rational to buy a traditional car for a few years, this is not the case for the enlightened one. From society's perspective the decision is clear; lower costs in the long run, fewer diseases and cleaner air.

There has been controversy over whether the electric car is cleaner when taking into consideration production and extraction costs (of rare metals). Recent studies recommend regulators to pay attention to this problem and impose stricter recycling rules. Battery technology improves radically and offers new opportunities for storing decentrally produced energy e.g. from panels on the roofs.

Policy decides the speed of change

Even from the myopic perspective, combustion engines would no longer be competitive if fossil energy were not subsidized (by about 80 bn € for Europe). Taxes for emissions should be increased (those for labor and corporations reduced). The European Commission should recommend this change and revive emissions trading.

Governments are called on to inform citizens about the implications of the Paris Agreement. Information is one of the core functions of the government. Lobbying by the automotive industry for a premium for marginally cleaner cars should be rejected, since this extends the lifetime of a nonviable technology. Subsidies for alternatives are more efficient if older technologies were not also subsidized in parallel. And if the car industry knows that next time they deceive the public there will be strong penalties (for managers, regulators and firms), they will invest in change.

Infrastructure for recharging can be enforced if public buildings and firms with parking spaces and parking garages are obliged to provide loading stations. Buses, taxis and transport services in the cities, should obligatory be electric.

Competiveness and employment

The loss of employment in firms producing cars driven by gasoline or Diesel is used as an argument for prolonging the lifetime of conventional cars. But the real threat to employment arises if the European firms forego the chance to become technology leaders in alternative mobility and storage technology. Sticking to the old technology enables China to dominate the low price segment and California the high price segment of electric cars.

Will the State of the Union address announce a change?

A possibility for change would be the new Strategy for Europe which has been promised for next months, and which was prepared by five reflection papers. Unfortunately, none of these was about how Europe could comply with the Paris agreement. President Juncker also missed a chance in his State of the Union speech. He dis not sketch how Europe could take the lead in clean technologies, including those substituting the combustion engine.

Karl Aiginger is the director of the European Policy Crossover Centre-Vienna Europe and professor of economics at Vienna’s University of Economics and Business. He is grateful to Angela Koeppl and Stefan Schleicher (WIFO) for comments on an earlier version